You’ll probably get different answers and advice regarding what you can afford depending on who you ask. However, a good rule of thumb is the 28/36 rule.
The 28/36 rule is a benchmark used by many lenders to estimate how great of a loan they can offer you.
This is how it works:
The 28% represents the amount of your gross monthly income that should go towards your house payment, and this should include:
To estimate your payment, simply multiply your monthly gross income (amount before taxes) by 28% (or .28). This should provide a good estimate of how much you can afford to pay for your home.
The 36% of the 28/36 rule represents the total number of your gross income that should go towards debt, leaving about 8% (36% minus 28% = 8%) for other debt, the most common debt being a car loan.
The remaining 64% of your gross income (100% gross income minus 36% total debt = 64%) is broken down as follows:
- 30% of your gross income goes toward taxes
- 34% for everything else including but not limited to: food, entertainment, vacation, savings, and investments
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